In re Merrill Lynch Trust Co. Fsb
Decision Date | 24 August 2007 |
Docket Number | No. 04-0865.,04-0865. |
Citation | 235 S.W.3d 185 |
Parties | In re MERRILL LYNCH TRUST COMPANY FSB, Merrill Lynch Life Insurance Company, and Henry Medina, Relators. |
Court | Texas Supreme Court |
Charles A. Gall, Joel Randall Sharp, Hunton & Williams LLP, Robert B. Gilbreath, Hawkins, Parnell & Thackston, LLP, Jeffrey L. Crouch, Melinda Morrell Hough, Jenkens & Gilchrist, P.C., Dallas, Jorge C. Rangel, Jon D. Brooks, The Rangel Law Firm, P.C., Corpus Christi, for Merrill Lynch Trust Company FSB, Merrill Lynch Life Insurance Company and Henry Medina.
J.A. (Tony) Canales, Hector Antonio Canales, Nancy M. Simonson, Canales & Simonson, P.C., Corpus Christi, for Juan Alaniz.
In considering referral to arbitration, the question is not which forum is quicker, cheaper, or more convenient, but which one the parties picked.1 Here, the plaintiffs agreed to arbitrate with Merrill Lynch, but not the employee or affiliates they have sued. Because their claims against the employee are in substance claims against Merrill Lynch, we hold those claims must be arbitrated. Because there is no contract theory that ties the affiliates to the same agreement, we hold those claims do not. And to the extent these separate proceedings overlap, we hold the litigation must be stayed until the arbitration is completed.
Juan Alaniz was severely injured in a refinery explosion. He and his wife filed suit and recovered a settlement of more than $2 million. To preserve this recovery, they engaged Merrill Lynch, Pierce, Fenner & Smith Inc. through its employee Henry Medina to provide financial and investment services. In September 1993, the Alanizes opened a series of cash and investment accounts with Merrill Lynch. For each account, the Alanizes agreed to arbitrate any disputes that might arise with Merrill Lynch:
I agree that all controversies which may arise between us, including but not limited to those involving any transaction or the construction, performance, or breach of this or any other agreement between us, whether entered into prior, on or subsequent to the date hereof, shall be determined by arbitration.
As a part of their financial plan, the Alanizes set up an irrevocable life insurance trust with Merrill Lynch Trust Company as trustee, which then purchased a variable life policy from Merrill Lynch Life Insurance Company. Both of these Merrill Lynch affiliates had their own contracts with the Alanizes, neither of which contained an arbitration clause. The Alanizes transferred more than $200,000 from their Merrill Lynch accounts to ML Trust to pay premiums to ML Life. ML Life paid a commission on the sale to Merrill Lynch, which then paid Medina, a licensed agent for ML Life and other insurers.
In April 2003, the Alanizes sued ML Trust, ML Life, and Medina — but not Merrill Lynch — alleging a dozen multifarious claims, all related to the insurance trust, and all asserted against the defendants collectively without differentiating the actions of each. The defendants moved to stay the litigation and compel arbitration, which the trial court denied. The Thirteenth Court of Appeals denied mandamus relief.2
The parties agree that the Federal Arbitration Act applies.3 Accordingly, mandamus relief is appropriate if the trial court abused its discretion in failing to stay the litigation and compel arbitration.4
The claims against Merrill Lynch's employee, Henry Medina, must go to arbitration for two reasons.
First, "parties to an arbitration agreement may not evade arbitration through artful pleading, such as by naming individual agents of the party to the arbitration clause and suing them in their individual capacity."5 Corporations can act only through human agents, and many business-related torts can be brought against either a corporation or its employees.6 If a plaintiff's choice between suing the corporation or suing the employees determines whether an arbitration agreement is binding, then such agreements have been rendered illusory on one side.7 As we recently noted, this would not place arbitration agreements on equal footing with other contracts:
When contracting parties agree to arbitrate all disputes "under or with respect to" a contract (as they did here), they generally intend to include disputes about their agents' actions because "[a]s a general rule, the actions of a corporate agent on behalf of the corporation are deemed the corporation's acts." If arbitration clauses only apply to contractual signatories, then this intent can only be accomplished by having every officer and agent (and every affiliate and its officers and agents) either sign the contract or be listed as a third-party beneficiary. This would not place such clauses on an equal footing with all other parts of a corporate contract.8
Second, the substance of the plaintiffs' suit here is against Merrill Lynch, even though it has not been named as a party. While the plaintiffs allege they are suing Medina only for his actions while wearing "the hat of the insurance agent," brokers do not change employers every time they sell someone else's product. The commission on this insurance transaction was paid directly to Merrill Lynch, not Medina; if the latter was acting as an agent for ML Life or ML Trust, then so was the former. As there is no question Medina was acting in the course and scope of his employment, if he is liable for the torts alleged against him, then Merrill Lynch is too.9
While the plaintiffs have not sued Merrill Lynch yet, they have not "disavowed" such claims (as Justice Hecht asserts). They have never so stipulated under oath or in their pleadings, and their appellate brief says only that the defendants have not shown that Merrill Lynch has any potential liability, thus carefully leaving the door open for the plaintiffs to pursue precisely that option.10 Nor do the plaintiffs' trial court pleadings "focus solely" on the insurance sale (again per Justice Hecht); to the contrary, they focus entirely on the alleged misrepresentations, omissions, and fiduciary breaches leading up to it. While only ML Trust might be liable for the transaction itself, Medina and his employer would both be liable for the preliminary tort and statutory claims the plaintiffs have actually alleged.11
Finally, the plaintiffs also assert their arbitration agreements were illusory as Merrill Lynch could modify or rescind those agreements at any time. As this defense relates to the parties' entire contract rather than the arbitration clause alone, it is a question for the arbitrators.12 Additionally, the plaintiffs' testimony that they failed to read the arbitration provisions until this dispute arose is not a valid ground for setting aside their signed agreements.13
We do not hold today that employees can always invoke an employer's arbitration agreement. When actions outside the course of employment cannot be attributed to an employer, the latter would have no need to invoke its arbitration protections.14 But under both Texas and federal law, arbitrability turns on the substance of a claim, not artful pleading.15 Because the plaintiffs' claims against Medina are in substance claims against Merrill Lynch, they must abide by their agreement to arbitrate those claims.16
Merrill Lynch's cash management agreements referred to some affiliates and third parties, but not ML Trust or ML Life. Those affiliates signed their own contracts with the plaintiffs, which had no arbitration clauses. As allowing these affiliates to compel arbitration would effectively rewrite their contracts, we hold they cannot.
"A corporate relationship is generally not enough to bind a nonsignatory to an arbitration agreement."17 Unlike a corporation and its employees, corporate affiliates are generally created to separate the businesses, liabilities, and contracts of each. Thus, a contract with one corporation — including a contract to arbitrate disputes — is generally not a contract with any other corporate affiliates.18
Of course, if two corporations are actually operated as one, many courts recognize an alter-ego exception that will bind one to the arbitration agreements of the other.19 But there are no such allegations here, and the exception itself illustrates that arbitration agreements generally do not apply to all corporate affiliates. Thus, we hold ML Trust and ML Life are not covered by the plaintiffs' arbitration agreements with Merrill Lynch.
ML Life and ML Trust also assert that they can invoke Merrill Lynch's arbitration agreements through an estoppel theory based on substantially interdependent and concerted misconduct.
Estoppel is one of five or six instances in which the federal circuit courts require arbitration with nonsignatories.20 We too have applied estoppel when nonsignatories seek a direct benefit from a contract with an arbitration clause.21 But we have never compelled arbitration based solely on substantially interdependent and concerted misconduct,22 and for several reasons we decline to do so here.
First, the United States Supreme Court has never construed the Federal Arbitration Act to go this far. It has repeatedly emphasized that arbitration "is a matter of consent, not coercion,"23 that the Act "does not require parties to arbitrate when they have not agreed to do so,"24 and its purpose is to make arbitration agreements "as enforceable as other contracts, but not more so."25 Thus, arbitration is not required merely...
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